New DoJ Criminal Probe Spotlights Tether (USDT)’s Ties To Bitcoin Price Manipulation And Fixing
American prosecutors launched a broad criminal probe into the world of cryptocurrencies months ago. Now, Bloomberg reports that the criminal probe is specifically focusing on Tether’s connections with bitcoin price fixing.
Last year, bitcoin rose at a preposterous rate, closing the year at a record high close to $20,000. At the time, some suggested the rise was at least partially fueled by Tether, the controversial stablecoin that claims to have a huge hoard of US Dollars stashed in a bank somewhere.
In fall 2017, Tether was issuing millions of dollars’ worth of USD Tether digital tokens on a weekly basis. Essentially, Tether was pumping cash into the market. Theoretically, this was fine because every USD Tether is backed 1:1 with a real USD. In practice, however, Tether has continuously refused to perform audits while jumping from one shady bank to another.
Now, the feds have taken note.
Earlier this year, federal prosecutors in the United States opened a broad criminal probe into cryptocurrencies. In recent weeks, however, they’ve focused specifically on Tether and bitcoin price fixing.
As Bloomberg reports:
“While federal prosecutors opened a broad criminal probe into cryptocurrencies months ago, they’ve recently homed in on suspicions that a tangled web involving Bitcoin, Tether and crypto exchange Bitfinex might have been used to illegally move prices, said three people familiar with the matter.”
Tether, Bitfinex, And Others May Have Engaged In Price Fixing
There are a number of shady things about Tether Ltd. The first is that Tether has the same management team as controversial cryptocurrency exchange Bitfinex. This connection hasn’t been publicly acknowledged – it was only revealed through court documents leaked online.
Last year, analysts – including Twitter’s infamous Bitfinex’ed account – started noticing a curious trend. As bitcoin was rising to $20,000, it would periodically go through a dip. During these dips, Tether would mysteriously release millions of dollars’ worth of new USD Tethers, propping up the market and causing bitcoin’s price to continue rising.
“Some traders — as well as academics — have alleged that these Tethers are used to buy Bitcoin at crucial moments when the value of the more ubiquitous digital token dips. JL van der Velde, the chief executive officer of Tether Ltd. and Bitfinex, has previously rejected such claims.”
This isn’t some vast conspiracy theory or outlandish concept. In fact, both Tether Ltd. and Bitfinex received subpoenas last year from the CFTC.
Now, as reported by Bloomberg, the Justice Department and the CFTC are coordinating their examinations.
Bitfinex’ed, by the way, gleefully tweeted today’s Bloomberg article earlier this morning, saying, “I’m not as dumb as I thought I was.” The article reinforces many of the things Tether critic Bitfinex’ed has been tweeting for months.
What Is The Justice Department Investigating?
To be clear, the Justice Department is merely investigating the connection between Tether, Bitfinex, and bitcoin price fixing. They have not charged anyone with anything. It’s possible that the investigation will not turn up anything illicit.
According to Bloomberg, the latest investigation is focused on one specific part of bitcoin price fixing:
“A focus of the Justice Department’s investigation is whether the dramatic rise of digital tokens in recent years was purely driven by actual demand, or was partially fanned on by market tricks. Along with the CFTC, prosecutors have been looking into a number of trading strategies, including spoofing — the illegal practice of flooding the market with fake orders to trick other traders into buying or selling, Bloomberg reported in May.”
The Justice Department is specifically examining how Tether creates new coins and why they enter the market primarily through Bitfinex.
Theoretically, Tether should only release new USD Tethers when someone has paid them USD. If an exchange deposits $20 million into Tether’s account, for example, then Tether should issue $20 million of USD Tethers to that exchange. This is how the system is supposed to work.
The Justice Department’s investigation might turn up something more illicit, however.
The organization is exploring whether Tether was used to buy bitcoin at strategic times. Tether may have been issued without ever receiving a USD deposit, for example. Tether may have been issued arbitrarily to ensure the price of bitcoin kept rising.
Two Professors Accused Tether Of Market Manipulation Earlier This Year
Earlier this year, two professors examined the issue of Tether’s price fixing. Their investigation revealed some condemning information about the controversial stablecoin.
University of Texas Professor John Griffin and co-author Amin Shams wrote a report explaining how Tether’s trading reveals a pattern of underpinning and manipulating bitcoin markets.
The report alleges that approximately half of bitcoin’s 1400% gain in 2017 was attributable to market manipulation transactions from Tether.
Here’s where things get interesting: the study’s author, John Griffin, spoke with the CFTC earlier this year, according to Bloomberg, which cited two people familiar with the matter.
Is This The End For Tether?
Nobody has been charged yet. However, it doesn’t look good for Tether and Bitfinex.
Maybe Bitfinex’ed is right – or maybe this is just an overblown controversy. We’ll have to wait for the results of the Justice Department’s probe. With crypto prices collapsing this week, however, these are dark times for the crypto community.